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Income Tax Appellate Tribunal, KOLKATA ‘B’ BENCH, KOLKATA
Before: Sri J. Sudhakar Reddy & Sri Aby T. Varkey]
Per J. Sudhakar Reddy :-
This cross appeal is directed against the order of the ld. Commissioner of Income Tax (Appeals)-3, Kolkata (hereinafter the ‘ld. CIT (A)’), passed u/s 250 of the Income Tax Act, 1961 (the ‘Act’), dt. 20/02/2017, for the Assessment Year 2013-14.
2 I.T.A. No. 513/Kol/2017 Assessment Year: 2013-14 & I.T.A. No. 963/Kol/2017 Assessment Year: 2013-14 M/s. Microfirm Capital Pvt. Ltd 2. Facts in brief:- The assessee is a company and is in the business of investment and financing. It filed its return of income for the Assessment Year 2013-14 on 28/09/2013, declaring total income at Rs. 59,30,891/-. The Assessing Officer noticed that the assessee company had allotted 2,05,000 shares, 0.1% redeemable non-cumulative preference shares (hereinafter ‘RNCPS), of a face value of Rs.10/- each, at a premium of Rs.1,990/- per share, redeemable on expiry of 10 years from the date of allotment at a redemptions price of Rs.5,200/- per preference share. As per the terms and conditions of issue of these RNCPS can be redeemed prior to the redemption date, on mutual consent and agreed terms. The assessee filed a valuation report from a Chartered Accountant as required under Rule 11UA(c)(c), in support of the valuation of RNCPS of Rs.10/- at a premium of Rs.1,990/-. A total of 75,000, 0.1% RNCPS were allotted to M/s Ashadeep Properties Private Limited and 1,30,000, 0.1% RNCPS were allotted to M/s. Jaguar Advisory Services Pvt. Ltd. The assessee had received an amount of Rs.41 Crores from this allotment. The Assessing Officer considered the valuation report furnished by the assessee regarding the fair market value of RNCPS , applied Section 56(2)(viib) of the Act, and came to a conclusion that the assessee has received consideration for issuance of shares in excess of the face value of such shares and that the assessee could not substantiate during the course of assessment proceedings that the fair market value for the issuance of preference shares adopted by the assessee in the fair and correct market value. He determined the market value of the preference shares issued at Rs.1285.41/- per share as against the market value of Rs.2,000/- per share determined by the assessee and the difference of Rs.14,64,90,950/-, was added as income.
2.1. The Assessing Officer’s conclusions are listed below:- a) Discounted cash flow method used by the valuer is accepted. b) The assessee company does not have the capability to generate sufficient funds to take care of its cash outflows and hence is likely to suffer a liquidity crunch. c) As the assessee’s profit is dipping over the years and its only source of generation of income is through dividend, which is in turn contingent on
3 I.T.A. No. 513/Kol/2017 Assessment Year: 2013-14 & I.T.A. No. 963/Kol/2017 Assessment Year: 2013-14 M/s. Microfirm Capital Pvt. Ltd the performance of the companies in which the assessee has made investments. d) The valuer has erred in adopting discount rate of 10 per cent by taking post tax return of 9 per cent and pre-tax return of 12 to 13 per cent on debt instruments. The burden of dividend distribution tax is minimal on the assessee and the taxation rate in the hands of the assessee is required to be considered and not of the investor. e) The prime lending rate of housing finance companies may be taken as a bench mark and this has to be taken as the average return on preference shares. Thus, a discounted rate of 15 per cent should be applied. The Assessing Officer made an addition of Rs.14,64,90,950/-, u/s 56(2)(viib) of the Income Tax Act, 1961.
2.1.1. The ld. Assessing Officer further held that the disallowance made by the assessee u/s 14A is inadequate. He computed the disallowance at Rs.11,88,000/- as against Rs. 2.46 Lacs, disallowed by the assessee. Aggrieved the assessee carried the matter in appeal.
2.1.2 Before the ld. First Appellate Authority, the assessee submitted that no opportunity was given to it by the Assessing Officer and the valuation done by a qualified and authorised person was arbitrarily disturbed by the Assessing Officer. It was submitted that a showcause notice should have been given by the Assessing Officer and the assessee should have been given a chance to clarify various issues raised by the Assessing Officer on the issue of valuation. Submissions were also made on the disallowance made u/s 14A of the Act. The ld. First Appellate Authority, using his co-terminus powers with that of the Assessing Officer, granted opportunity to the assessee to submit its objections on the various conclusions drawn by the Assessing Officer, on the issue of valuation of RNCPS. A remand report was called from the Assessing Officer on all the submissions made by the assessee. After considering the remand report and the replies and the contention of the assessee, the ld. First Appellate Authority held as follows:- (a) Section 56(2)(viib) of the Act, applies to the facts of the case as the words used is “shares” which also includes preference shares.
4 I.T.A. No. 513/Kol/2017 Assessment Year: 2013-14 & I.T.A. No. 963/Kol/2017 Assessment Year: 2013-14 M/s. Microfirm Capital Pvt. Ltd (b) The Assessing Officer has the right and duty to examine the valuation report and to adjudicate upon all aspects which had a bearing on the income of the assessee. (c) That the reasoning adopted by the valuer as well as the Assessing Officer, suffers from certain shortcomings and it would be reasonable to adopt 12.5 per cent discount rate as against 10% adopted by the assessee and 15% adopted by the Assessing Officer. (d) On the issue of disallowance u/s 14A of the Act, he gave certain directions to the Assessing Officer. 2.3. Aggrieved, both the assessee as well as the revenue is in appeal before us.
The ld. Counsel for the assessee submitted that Section 56(2)(viib) was brought into the statute with an objective to deter generation and use of unaccounted money through infusion of fund from shareholders by way of share premium in excess of fair market value. He submitted that RNCPS are quasi debt instruments and not shares per se and hence these RNCPS are not covered by the provisions of Section 56(2)(viib) of the Act, which was introduced to deal with equity shares. He argued that in the case of RNCPS, the company is bound to return the money as per the contract, which is similar to a debt. He submitted that rising capital is very much necessary for economic growth, industrial development and increase in employment of the country. Thus, he submits that purposive and liberal interpretation has to be given to the Section and in cases where the company is to return the money it received by way of RNCPS, the Section itself should not be applied.
3.1. The second contention of the ld. Counsel for the assessee is that the statute read with the Rules provide that, the fair market value of the RNCPS should be supported by report from a Merchant Banker or an Accountant, who are experts in that field. He submits that the Chartered Accountant, who is an expert in the field of valuation of shares has given a detailed report and that the Assessing Officer, who is not an expert in the matter, cannot interfere and tamper with the fair market value as determined by the valuer. He contends that in case the Assessing Officer does not agree with the valuation made by the expert, the only alternative
5 I.T.A. No. 513/Kol/2017 Assessment Year: 2013-14 & I.T.A. No. 963/Kol/2017 Assessment Year: 2013-14 M/s. Microfirm Capital Pvt. Ltd would be to refer the matter to an expert. For the proposition that the Assessing Officer cannot interfere with the valuation made by a valuer, who is an expert, he relied on the decision of the Hon’ble Supreme Court in the case of Dr. Mrs. Renuka Datla Vs. Solvay Pharmaceutical (2004) 265 ITR 435 (SC) and the case of C.A. No. 5929 of 1997 Duncans Industries Ltd. vs. State of U.P. and Ors.. He further submitted that Section 56(2)(viib) of the Act, seeks to bring notional income to tax and hence strict interpretation has to be given and no income can be brought to tax unless the definite and concrete findings are brought about by the revenue. For this proposition of law he relied on the following case-law:- • Dhirajlal Girdharilal v. CIT reported in 26 ITR 737 • CIT vs. Daulatram Rawatmull reported in 87 ITR 249 • Dhakeshwari Cotton Mills Ltd. v. CIT reported in 26 ITR 775
3.2. On merits, the ld. Counsel for the assessee submitted that the Assessing Officer was factually incorrect in coming to the conclusion that the assessee does not have sufficient availability of funds for redemption of RNCPS for the reason that, it had made investment in equity shares of M/s Magna Fincorp Ltd. and the book value as on 31/03/2013 of this investment was Rs.119.46 Crores and the market value as on that day was Rs.280.46 Crores. He pointed out that the market value of this investment as on 31/10/2017 was Rs.595.76 Crores. He submitted that the assessee company can, any day liquidate a fraction of this investment and redeem the RNCPS. On the finding of the Assessing Officer on the issue of ascertainable cash flow, he submitted that readily sellable investment in equity shares are available with the assessee and when the market value of these equity shares is very high as compared to the value of RNCPS, the question of the assessee not having an ascertainable cash flow, does not arise. He pointed out that the assessee company had earlier issued redeemable preference shares and had also successfully redeemed them. He submitted that the investors in RNCPS, which included an independent unrelated party, did not have any doubt on the capability of the company to meet its contractual obligation of redemption of the preference shares. He vehemently contended that these conclusions of the Assessing Officer are not based on facts and are mere presumptions and assumptions.
6 I.T.A. No. 513/Kol/2017 Assessment Year: 2013-14 & I.T.A. No. 963/Kol/2017 Assessment Year: 2013-14 M/s. Microfirm Capital Pvt. Ltd 3.2.1. On the issue of considering the rate of return on the investment at 15 per cent, based on home loan rates, he submitted that these are lender driven. He submitted that these rates are applicable to customers depending on the income, documentation, valuation of property etc. and cannot be compared with the outlook of an investor. He further submitted that housing loans are given at floating rates and the assesse has no chance of investing in housing loans as they are regulated by National Housing Bank and Reserve Bank of India. He argued that the rate of return on preference shares should be higher than the post tax return on debt instruments. He pointed out that the prevailing rate of return on debt instruments was 12 to 13 per cent pre tax and after factoring taxation the net rate of return would be 8.12 per cent to 8.78 per cent. He submitted that the assessee has issue RNCPS, which gives a rate of return in excess of 8.2 per cent to 8.78 per cent. He further pointed out that the floating rate on home loans is around 12 to 13 per cent and without prejudice to his arguments, he submitted that this rate may be taken and if tax is factored, the post rate return would be around 10.13 per cent and that this is the rate taken by the assessee. 3.3. The ld. Counsel for the assessee submitted that the Assessing Officer has wrongly rejected the valuation done by an independent accountant. He further submitted that the Assessing Officer has ignored the prevailing rate of return on Preference Shares of other companies and that the during the relevant period the same ranged from 8-10 per cent. He cited the following examples:-
a) Edelweiss Commodities Services Ltd. 9.75% b) Tata Capital Ltd. 8.33% c) L&T Finance Holdings Ltd. 8.75%
On the issue of disallowance, u/s 14A of the Act, he submitted that the dividend in question was earned from M/s. Magma Fincorp Ltd., wherein the assessee is a strategic investor holding controlling interest and hence Section 14A, does not apply. He submitted that the assessee owns directly 17.91% of the equity shares in M/s. Magma Fincorp Ltd. and an additional 15.50 per cent of the equity shares through its group company Celica Developers Pt. Ltd., totalling to 33.41% of the share holding. He further submitted that the assessee is engaged in money
7 I.T.A. No. 513/Kol/2017 Assessment Year: 2013-14 & I.T.A. No. 963/Kol/2017 Assessment Year: 2013-14 M/s. Microfirm Capital Pvt. Ltd lending business and that it has interest income of 70.74 Lacs and that this fact was ignored by the Assessing Officer and net expenditure has been allowed by the same. He further argued that the assessee had suo moto disallowed 2.46 Lacs u/s 14A in the return of income and that the Assessing Officer has not recorded satisfaction as to how the assessee was wrong in offering only Rs.2.46 Lacs as disallowance u/s 14A and that, the invocation of Rule 8D, is bad in law. He relied on certain decisions in support of his contentions, which will be dealt by us as and when necessary.
The ld. DR, Md. Usman, CIT DR, on the other hand vehemently opposed the contentions of the assessee. He took this Bench through Section 56(2)(viib) of the Act, and submitted that the legislature has used the word “shares” and hence the arguments of the assessee that redeemable preference shares are quasi debt and hence out of the scope of Section 56(2)(viib) of the Act, is wrong. Referring to the CBDT Circular relied upon by the assessee, he submitted that this does not apply as it relates to valuation of equity shares only and not RNCPS. On the argument as to whether the Assessing Officer has the power to examine the valuation report and assess the fair market value, he submitted that the Assessing Officer does have the power and is duty bound to examine as to whether the valuer has based his valuation on relevant material and as to whether the valuation is properly done or not. He pointed out that there is no provision in law to refer valuation of shares to another expert by the Assessing Officer for valuation. He submitted that when valuation report contains errors and ignores relevant facts, the Assessing Officer can interfere in the same. He submitted that the case-law relied upon by the assessee on this issue, in fact support this view.
5.1. The ld. DR submitted that the issue was regarding RNCPS, wherein the annual dividend payable is only 0.1 per cent of the face value. He submitted that this rate of return by way of annual dividend is ridiculously low and no prudent investor would make investment for such a return. He further submitted that the assumptions made by the valuer in his report are fundamentally wrong as it was assumed that there would be an assured cash flow in the future. He pointed out that this assumption is not based on facts, as the profit earned by the assessee
8 I.T.A. No. 513/Kol/2017 Assessment Year: 2013-14 & I.T.A. No. 963/Kol/2017 Assessment Year: 2013-14 M/s. Microfirm Capital Pvt. Ltd demonstrates that it does not have an assured and ascertainable cash flow in the future. He relied on the observations of the Assessing Officer and submitted that the assessee would have cash flow issues in the future and such liquidity crunch would affect the credit rating of the assessee and consequently the valuation of the preference shares issued at a premium, gets affected. He relied on each and every observation of the Assessing Officer and supported the same. On a query from the Bench as to how the Assessing Officer fixed a premium of above Rs.1,270/- per share, when in his view the assessee has no credit rating and would default on repayments, he submitted that this was based on rate of return.
On the issue as to whether the post tax return has to be taken for bench marking the rate of return, he submitted that there is no tax on dividend from preference share and that there is hardly any dividend declared during the period on this RNCPS and hence it is not a factor to be considered. On the issue of bench marking the rate of return with home loan interest rates, he submitted that this was a very conservative rate taken by the Assessing Officer as the home loans are given at a concessional rate and that too with full security. Thus he says 15 per cent discount rate taken by the Assessing Officer has to be upheld and the order of the ld. CIT(A), reversed. On Section 14 A of the Act, he relied on the order of the ld. CIT(A).
In reply the ld. Counsel for the assessee submitted that an investor has no option of advancing money as a housing loan to public, as the same is controlled by National Housing Bank and Reserve Bank of India. Hence, he submits that the housing loan rates cannot be taken as comparable investment opportunities. He submitted that investments are made in shares for the reason that, the dividend earned from the same are not subject to Income Tax and whereas the interest earned on debt instruments are subject to Income Tax. So, he submitted that to make the returns comparable, the tax factor has to be considered. On the argument of the ld. DR that the assessee has no liquidity and would possibly default in redeeming these preference shares, he submitted that the value of his investments have grown from Rs.119.46 crores in March, 2013 to about Rs.600 Crores on 31st October, 2017 and the company can any day liquidate its investments and redeem
9 I.T.A. No. 513/Kol/2017 Assessment Year: 2013-14 & I.T.A. No. 963/Kol/2017 Assessment Year: 2013-14 M/s. Microfirm Capital Pvt. Ltd the preference shares as per law. He strongly disputed the theory that the assessee would possibly face a liquidity crunch, which would in turn affect its credit rating. He pointed out that one of the investors was a independent party and this demonstrates that the issue of RNCPS was made at market value, which was at Arms’ Length.
Rival contentions heard. On a careful consideration of the facts and circumstances of the case and a perusal of the papers on record, orders of the Authorities below as well as the case-law cited, we hold as follows:-
8.1. Section 56(2)(viib) of the Act, reads as follows:-
“(viib) Where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: 8.2. Rule 11UA (1)(c)(c), reads as follows:- “(c) the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of which such valuation.”
A perusal of Section 56(2)(viib) of the Act, takes us to a conclusion that all types of shares are covered by this Section. The argument of the assessee that RNCPS is a quasi-debt and that it was not the intention of the legislature to bring such instruments within the ambit of this Section, is devoid of merit. We also do not find any merit in the arguments of the ld. Counsel for the assessee that economic consideration that are related to capital formation, employment, industialisation etc. should lead to purposive and liberal interpretation of the Section. RNCPS cannot be excluded from the ambit of Section 56(2)(viib) of the Act. Hence, we reject these argument of the ld. Counsel for the assessee.
9.1 The second argument of the ld. Counsel for the assessee is that the assessee has categorically followed the prescription of law and taken a valuation report from an independent accountant and that the Assessing Officer is not an expert in
10 I.T.A. No. 513/Kol/2017 Assessment Year: 2013-14 & I.T.A. No. 963/Kol/2017 Assessment Year: 2013-14 M/s. Microfirm Capital Pvt. Ltd this field and hence cannot interfere in this report and arrive at a different valuation. We do not find any merit in this contention. The Hon’ble Supreme Court in the case of Duncans Industries Ltd. vs. State of U.P. and Ors (supra), the case-law, which was relied upon by the assessee has at page 9 held as follows:-
“These valuers are technical persons who have while valuing the plant and machinery taken into consideration all aspects of valuation including the life of the plant and machinery. The valuations made both by the Enquiry Committee as well as the valuers are mostly based on the documents produced by the appellant itself. Hence, we cannot accept the argument that the valuation accepted by the Collector and confirmed by the revisional authority is either not based on any material or a finding arrived at arbitrarily. Once we are convinced that the method adopted by the authorities for the purpose of valuation is based on relevant materials then this Court will not interfere with such a finding of fact. That apart, as observed above, even the counsel for the appellant before the High Court did not seriously challenge the valuation and as emphasised by the High Court, rightly so. Therefore, we do not find any force in the last contention of the appellant also. (emphasis ours) 16. For the reasons stated above, this appeal fails and the same is dismissed with costs.” 9.1.1. A perusal of the same demonstrates that if the valuation is not based on relevant material, the adjudicating authority can interfere with the same. In the case of Dr. Mrs. Renuka Datla Vs. Solvay Pharmaceutical (supra), relied upon by the ld. Counsel for the assessee, there is no finding that the Assessing Officer cannot interfere with the valuation done by the valuer. In this case valuation was done in a dispute between shareholders holding controlling interests and the minority interest and this valuation report was examined and found to be correct. The Court observed as follows:-
“We do not think that the valuation in the instant case runs counter to the principles laid down therein. As seen from enclosures 6.1 and 6.2 to the valuation report, the valuer had arrived at market based valuation in addition to the other modes of valuation and observed that the recommended value is the higher of the intrinsic value or the market based value. Thus, the petitioners had the benefit of higher valuation. The first principle laid down in the above decision has been kept in view. Moreover, the profit-earning method which has been referred to in the above decisions in the context of valuation of shares of a public limited company has also been applied, though future earnings based valuation has not been done in the absence of reliable figures. As observed by us earlier, the profit-earning capacity of the company has not been excluded from consideration. Thus, the valuer's mode of valuation does not in any way infringe the principles laid down in the said decisions to the extent they are applicable. In the final analysis, we are of the view that the valuer approached the question of valuation having due regard to the terms of settlement and applying the standard methods of valuation. The
11 I.T.A. No. 513/Kol/2017 Assessment Year: 2013-14 & I.T.A. No. 963/Kol/2017 Assessment Year: 2013-14 M/s. Microfirm Capital Pvt. Ltd valuation has been considered from all appropriate angles. No case has been made out that any irrelevant material has been taken into account or relevant material has been eschewed from consideration by the valuer. The plea that the valuation is vitiated by fundamental errors cannot but be rejected. In the result IA Nos. 2 to 4 of 2002 are liable to be rejected. However, there is one direction concerning the interest which we consider appropriate to give in the given facts and circumstances of the case. Though the grant of interest, as prayed for by the petitioners, from 31st May, 2002-the stipulated date of submission of valuation report is not called for, we feel that the ends of justice would be adequately met if the respondents concerned are directed to pay the interest at the rate of 9 per cent, on Rs. 8.24 crores, which is the value of shares fixed by the valuer, for a period of 12 months. True, the petitioners contested the valuation and thereby delayed the implementation of settlement. However, having regard to the bona fide nature of the dispute and the fact that the respondents have , retained the money otherwise payable to the petitioners during this period of 12 months and could have profitably utilized the same, we have given this direction taking an overall view. In the result I.As. Nos. 2, 3 and 4 of 2002 are dismissed subject to the above direction as to payment of interest. The SLP(C). Nos. 18035, 18041-18042 of 2002 shall stand disposed of in terms of the settlement on record coupled with the direction to pay the sum of Rs. 8.24 crores representing the value of 4.91 per cent, shares together with interest at 9 per cent, for a period of 12 months within a period of four weeks from today subject to the receipt of share transfer forms and the fulfilment of other formalities by the petitioners. The suits which have given rise to these SLPs, and other suits and proceedings mentioned in the memorandum of settlement shall stand dismissed as withdrawn. Accordingly, the SLPs are disposed of. No order as to costs.”(emphasis ours) 9.1.2. The above shows that the valuation done by an expert was upheld on merits. A specific observation is made that the Principles of valuation have been followed and relevant material considered. Hence, this argument is rejected as devoid of merit. The contention of the ld. Counsel for the assessee that in case the Assessing Officer is not satisfied with the value determined by the expert valuer then the only option is to get it done by another expert valuer is also devoid of merit. The Assessing Officer can replace the irrelevant material, if any, considered by the valuer with relevant material and modified the value in a fictitious manner. Thus this argument is hereby rejected. In our view the Assessing Officer has not only a right but he is also duty bound to examine the valuation report evaluate it and record his findings on the same. Such finding should be based on relevant material and rational view taken in a judicious manner.
As far as the argument of the ld. Counsel for the assessee that Section 56(2)(viib) of the Act, bring notional income to tax as it is a deeming provision and hence has to be strictly interpreted, we are of the opinion that this argument has force. The need for such interpretation has not arisen in the case on hand.
12 I.T.A. No. 513/Kol/2017 Assessment Year: 2013-14 & I.T.A. No. 963/Kol/2017 Assessment Year: 2013-14 M/s. Microfirm Capital Pvt. Ltd 11. Now, we consider the rival contentions on the determination of the Fair Market Value of these RNCPS. There is no dispute on the method of valuation of these RNCPS. The valuer has adopted “discounted cash flow” method of valuation and the Assessing Officer has accepted the same.
11.1. The difference between the assessee and the Revenue are on material facts. The issues can be summarise as follows:-
a) Whether the cash flow of the assessee is ascertainable and whether there would be a liquidity crunch leading to default in contractual obligation by the assessee in the future years. b) Whether while bench marking the rate of return, tax is to be considered and factored or not. c) Whether interest rate of a housing loan can be used as a bench mark the rate of return or is there any other relevant comparable. 11.2. On the first issue of liquidity we find that the Assessing Officer has not considered market value of investments held by the assessee company. Against the book value of Rs.119.46 Crores as on 31/03/2017, the market value has grown up to Rs. 280.46 Crores on the same date i.e., 31st March, 2017. The observations of the Assessing Officer and the arguments of the ld. DR on the issue of cash flow, in our view are not based on facts and are mere presumptions and assumptions. The arguments that the assessee would suffer a liquidity crunch and would default on its repayments and redemptions and hence this factor would reduce the credibility and credit rating of the assessee is also based on surmises and conjectures. When the assessee has such good investment portfolio which has grown in value and when the same can be liquidated, such conclusions are factually incorrect. When the assessee’s outflow by way of dividend is 0.1 per cent on RNCPS, the requirement of having huge cash inflows does not arise specifically when the assessee is an investment company. The contention of the assessee that the current market value of its investments in equity shares of M/s.Manga Fincorp Ltd. is Rs.595.76 Crores and that he can, any day sell these investment and redeem the preference shares amounting to Rs.41 Crores only, has force and the conclusion of the Assessing Officer on the issue of liquidity, possible cash crunch resulting in reduction of credit rating etc. is wrong on facts and hence devoid of merit. Thus
13 I.T.A. No. 513/Kol/2017 Assessment Year: 2013-14 & I.T.A. No. 963/Kol/2017 Assessment Year: 2013-14 M/s. Microfirm Capital Pvt. Ltd this finding of the Assessing Officer and arguments of the ld. DR, is rejected. We also find that the Assessing Officer has taken contradictory stand on this issue. On the one hand he held that the assessee is a possible defaulter and on the other hand determined the premium chargeable on RCPS at Rs.1,270/- per share of Rs.10/-. There is no gain saying that a defaulter cannot command a premium on its shares. In fact from an investors perspective, no investment would be made in such cases. In this case an unrelated 3rd partly also invested. It can be assumed that such investments are done after due diligence. Hence this contention of the assessee is accepted.
This brings us to the issue as to whether while determining the rate of return Income Tax payable has to be factored or not. An investor, when he has to make a choice as to whether he should invest in a debt instrument or in equity shares, the tax factor is necessarily considered, as what is crucial is the take home return on investment. The growth in value of investments, safety and other factors are also the basis of decision making. Dividend on equity shares does not attract any tax and whereas interest on debt instruments and even interest on fixed deposits, do attract Income Tax. Thus, the arguments that Income Tax should not be factored while considering the rate of return from debt instruments while comparing the same with the rate of return on equity instruments is devoid of merit. In our view, tax has to be factored while determining the net rate of return on investments.
12.1. Hence, this argument of the revenue is hereby rejected and the contention of the assessee on this issue is accepted.
Coming to the last aspect, as to whether home loan interest rate has to be taken for the purpose of bench marking, we are of the view that it would not be correct to do so on the facts of this case. Home loans can be given by Banks and other NBFCs which are in the business of giving loans and advances and which have taken regulatory approvals to do so. Home loans are generally secured loans. A general investor has no choice of granting home loans. The rate of return for an investor should be considered and composed of instruments in which, he can deploy his funds. A choice of investment can be a fixed deposit or bonds issued by
14 I.T.A. No. 513/Kol/2017 Assessment Year: 2013-14 & I.T.A. No. 963/Kol/2017 Assessment Year: 2013-14 M/s. Microfirm Capital Pvt. Ltd the Government or the Reserve Bank of India or debentures issued by various companies, when the investor seeks to invest in debt instruments. In equity shares or preference shares etc. in case he chooses to invest in equity. Thus taking home loan interest rates for the purpose of bench marking, in our view is highly erroneous as the investor has no choice or possibility of advancing housing loan.
Now we have to arrive at the rate of return that has to be bench marked in this case. The rate of return on preference shares issued by other companies for the relevant period in our view are relevant material for arriving at such a decision. The assessee furnished data from Edelweiss Commodities Services Ltd., Tata Capital Ltd., and L&T Finance Holdings Ltd.. In our view, these are proper comparables for the purpose of bench marking the rate of return. The valuer in our considered view has followed an accepted method of valuation and has based his decision on relevant material.
14.1. In the case on hand, the Assessing Officer has not disputed the fact that on the facts of the case the assesse is entitled to issue RNCPS at a huge premium. The only dispute is the quantum of premium. The Assessing Officer was of the view that 15 per cent discount factor which gives a fair market value of Rs.1285.41 per share be adopted and whereas the valuer determined the fair market value at Rs.2,000/- per share by adopting 10 per cent discount factor. The ld. CIT(A), in an arbitrary manner placed the discount factor at 12.5 per cent. The ld. CIT(A), has not given any material or reason for arriving at this rate of discount. In our view the conclusion of the valuer that 10 per cent discount factor is appropriate in the case on hand is upheld as it is based on proper comparable for bench marking.
14.1.1. As already discussed the discount factor arrived at by the Assessing Officer, in our view is not based on relevant material. The objections of the Assessing Officer to valuers report are devoid of merit as pointed out by us in the earlier paragraphs of this order. The ld. CIT(A)’s view is an ad-hoc view and has to be necessarily rejected. We also give weightage to the fact that an unrelated independent investor has invested in these RNCPS on the terms and conditions, at this Fair Market Value of Rs.2,000/- per share. Thus this rate of Rs.2,000/- per share is the Arms’ Length Price, on the facts of this case. Hence, we have to hold
15 I.T.A. No. 513/Kol/2017 Assessment Year: 2013-14 & I.T.A. No. 963/Kol/2017 Assessment Year: 2013-14 M/s. Microfirm Capital Pvt. Ltd that these RNCPS, were issued at a fair market value. Hence we uphold the fair market value determined by the valuer and vacate the valuation arrived at by the Assessing Officer as well as the ld. CIT(A).
In view of the above discussion, the addition of Rs.14,64,90,950/- made u/s 56(2)(viib) of the Act, by the Assessing Officer to the extent sustained by the ld. CIT(A), is hereby deleted. Accordingly these grounds of the assessee are allowed and the grounds of the revenue are dismissed.
On the issue of disallowance u/s 14A, we find that the Assessing Officer has recorded a specific finding that he is not satisfied with the correctness of the claim of the assessee on the disallowance u/s 14A of the Act. Thus, this argument of the assessee that no satisfaction is recorded by the Assessing Officer in not factually correct. Hence this argument of the ld. Counsel for the assessee is rejected. We find that the ld. CIT(A) has set aside the issue of qualification of disallowance u/s 14A to the Assessing Officer, with certain directions. The Ld. CIT(A) has no power to set aside any issue or the appeal itself after the amendment to Section 251 of the Act, w.e.f. 01/06/2001. In any event, the issue has to be considered afresh by the Assessing Officer as all relevant factors have not been considered as pointed out by the ld. CIT(A). No expenditure was allowed against earning of interest income. Hence we set aside this issue to the file of the Assessing Officer for fresh adjudication de-novo, in accordance with law. The Assessing Officer shall not be influenced by the direction of the ld. CIT(A) in his order. These are vacated. In the result, this ground is allowed for statistical purposes.
In the result, the appeal of the assessee is allowed in part and the appeal fo the revenue is dismissed.
Kolkata, the 30th day of November, 2017. Sd/- Sd/- [Aby T. Varkey] [J. Sudhakar Reddy] Judicial Member Accountant Member Dated : 30.11.2017 {SC SPS}
16 I.T.A. No. 513/Kol/2017 Assessment Year: 2013-14 & I.T.A. No. 963/Kol/2017 Assessment Year: 2013-14 M/s. Microfirm Capital Pvt. Ltd Copy of the order forwarded to: 1. M/s. Microfirm Capital Pvt. Ltd 24, Park Street Kolkata - 700016 2. The Deputy Commissioner of Income Tax Circle-8 (1) Aayakar Bhawan P-7, Chowringhee Square Kolkata – 700 069
CIT(A)- 4. CIT- , 5. CIT(DR), Kolkata Benches, Kolkata.